FCC picks its fights

Agency defers open access hearings to concentrate on AOL/Time Warner

Like the Olympic wrestlers now maneuvering leverage on their opponents in Sydney, Australia, the contending parties in the communications mega-mergers under consideration in Washington are circling each other, seeking the best position for themselves before they start grappling on approval conditions.

In this corner, the FCC and the Federal Trade Commission are squaring off against America Online and Time Warner. The FCC's review of the $123 billion combination has centered on the proposed merged company's ability to shut other competitors out of the markets in which it would participate and possibly dominate.

The primary thrust of the inquiry has been the potential anticompetitive effects of letting AOL gain control of Time Warner's cable holdings - the open access question. After months of saying it would give the marketplace a chance to force cable ISPs to open their networks, the FCC was scheduled to conduct hearings last week on possible future regulatory measures.

But in a surprise last-minute sidestep, the commission postponed those hearings for two weeks, said FCC Chairman William Kennard, although Commissioner Gloria Tristani requested a longer delay of a month.

The postponement gives the government room to negotiate for open access guarantees with AOL and Time Warner without the complications a public hearing would create, said Steven Whitsale, analyst with Riverine Securities.

"Hearings would blur the issues by bringing up reams of testimony that said the networks are already pretty open and getting more so," he said. "AOL/Time Warner could point to that as evidence that their memo of understanding [to open Time Warner's cable network] was a good start, and that the market would supply the rest."

Meanwhile, Congress may intervene. Reps. Bob Goodlatte, R-Va., and Rich Boucher, D-Va., sent a letter to the FCC and the FTC recommending that the agencies not impose open access conditions on an AOL/Time Warner merger until such rules cover all cable operators. Such special conditions would "place AOL/Time Warner at a crippling disadvantage" and create uncertainty on Wall Street in the value of all companies in the sector, they said.

Goodlatte and Boucher are sponsors of a bill to force cable operators to open their systems to unaffiliated ISPs. But the letter acknowledged that the bill would not pass during this session and urged the FCC to consider regulations that would apply open access rules "to all of the various technologies offering high-speed Internet access."

That broader approach to open access apparently is shared by the FTC, which reportedly wants to compel a merged AOL/Time Warner to open all its networks - not just cable, but also fixed wireless and satellite. The commission is considering requiring AOL to divest its interest in Hughes Electronics, the parent company of direct broadcast satellite operator DirecTV.

Opening access over all devices is also on the minds of merger opponents such as Walt Disney, which objects to the closure of AOL's interactive TV venture to other ISPs. Both AOL and Time Warner told the FCC on Sept. 7 that AOLTV will not accommodate other ISPs on the set-tops and that subscribers need to access the service.

Both federal agencies are apparently concerned about the numerous interrelations of a combined AOL/Time Warner and AT&T. That could work to AT&T's advantage as it seeks to comply with conditions imposed on its merger with MediaOne Group. At that time, the company said it would comply with the FCC's conditions that it shed 9.7 million cable customers or sell either its stake in Time Warner Enterprises or its Liberty Media Group, a spinoff programming division headed by John Malone.

Time Warner has been trying unsuccessfully to get rid of its TWE share.

"Having the federal government tell Time Warner to cut its ties with AT&T would be just what AT&T wants," said analyst Elaine Steiger with Neumann-Roddick Associates.

AT&T has until early November to announce how it will conform to the FCC conditions. That's about when influential Merrill Lynch analyst Henry Blodgett predicts the AOL/Time Warner merger will be considered for final approval by the FCC and the FTC.

AT&T Chairman and CEO C. Michael Armstrong reportedly visited Capitol Hill - most notably, Sen. Ted Stevens, R-Alaska, head of the Senate Appropriations Committee - to explore the possibility of restricting the FCC's ability to impose its merger conditions. Such legislation is not given much chance of success.

"I would resist strongly such action - strongly," said Sen. John McCain, R-Ariz., who heads the Senate Committee on Commerce, Science and Transportation. "I will do everything I can to block that."